In 1962, along with Marcus Fleming, he co-authored the Mundell–Fleming model of exchange rates, and noted that it was impossible to have domestic autonomy, fixed exchange rates, and free capital flows: no more than two of those objectives could be met. The model is, in effect, an extension of the IS/LM model applied to currency rates.

Single currency zones relied, therefore, on similar levels of price stability, where a single monetary policy would suffice for all.

His analysis led to his conclusion that it was a disagreement between Europe and the United States over the rate of inflation, partially to finance the Vietnam War, and that Bretton Woods disintegrated because of the undervaluing of gold and the consequent monetary discipline breakdown. There is a famous point/counterpoint over this issue between Mundell and Milton Friedman.[10]

This work later led to the creation of the euro and his prediction that leaving the Bretton Woods system would lead to "stagflation" so long as highly progressive income tax rates applied. In 1974, he advocated a drastic tax reduction and a flattening of income tax rates.

Mundell, though lionized by some conservatives, has many of his harshest critics from the right: he denies the need for a fixed gold based currency or currency board[citation needed] (he still often recommends this as a policy in hyperinflationary environments) and he is both a fiscal and balance of payments deficit hawk. He is well known for stating that in a floating exchange rate system, expansion of the money supply can come about only by a positive balance of payments.

In 2000, he predicted that before 2010, the euro zone would expand to cover 50 countries, while the dollar would spread throughout Latin America, and much of Asia would look towards the yen.[11] Such predictions have proved highly inaccurate.

Nobel Prize winner[edit]

Mundell won the Nobel Memorial Prize in Economic Science in 1999 for his lecture "A Reconsideration of the Twentieth Century". According to the Nobel Prize Committee, he got the honor for "his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas".

Mundell concluded in that lecture that "the international monetary system depends only on the power configuration of the countries that make it up". He divided the entire twentieth century into three parts by different periods of time:

In first third of the century, from its beginning to the Great Depression of the 1930s, economics was dominated by the confrontation of the Federal Reserve System with the gold standard.

The second third of the century was from World War II to 1973, when the international monetary system was dominated by fixing the price of gold with the US dollar.

The last third of the century started with the destruction of the old monetary system due to the problem of inflation.

With the destruction of the old monetary system, a new international monetary system was finally founded. Controlling inflation by each country became a main topic during this era.